Brian Rudman: Time to set Paula Bennett on to tax cheats

Beneficiary cheats face not just the wrath of the law but a public tongue-lashing from Social Development Minister Paula Bennett as well. Photo / File

Tax cheats and their legal abettors do live a charmed life.

Get caught making a fortune from selling hydroponic nursery equipment useful for growing marijuana plants and you end up not just facing up to seven years in jail but stand to have the presumed proceeds of your wrongdoing - your car, business, your home - confiscated as well.

Beneficiary cheats face not just the wrath of the law but a public tongue-lashing from Social Development Minister Paula Bennett as well. And just in case that's not enough, the law is to be amended so the Crown can "prosecute partners who know or benefit from such offending".

But tax cheats, the well-heeled "professionals" who, with the aid of accountants and lawyers, actively attempt to avoid their full tax obligations, get the "there but for the grace of God go I" treatment from the authorities. No dawn raids with cops armed with door-smashing jemmies for them. Instead, they can even be offered a partial amnesty if they 'fess up to past wrongdoing by a certain date.

So it was that last week, while Chester Borrows was in Parliament thundering about 525 beneficiaries having their benefits cut off because they were earning above the income threshhold and had failed to disclose their full circumstances, Inland Revenue was expressing delight that 429 tax cheats had come forward in the month of March to make "a voluntary disclosure" of their cheating.

This last-minute rush brought the number of people confessing to having paid themselves artificially low salaries to avoid the top personal tax rate up to 700.

The "amnesty" was announced in November 2011, after a Supreme Court test case which found that Christchurch surgeons Ian Penny and Gary Hooper had used company structures and family trusts to artificially lower their salaries to avoid the 39 per cent top tax rate introduced in 2001.

IRD's sweetheart deal was that anyone who came clean to similar trickery before the March 31 cut-off point would only face penalties for two years of wrongdoing dated back from November 2011. For those who have not come forward, Inland Revenue says they will be tracked down and face penalties going back four years.

IRD says the 700 confessions will result in about $20 million being recovered. That's not counting the unknown amount to be recovered from those yet to be caught. Of course, the pillars of society caught up in these schemes don't get pilloried. Instead, they're painted as unfortunate victims of confusing tax law.

Ironically, according to Mr Borrows, last year welfare cheats - about the same number as those taking advantage of the tax-rort amnesty - got away with about the same amount.

On February 20, he told the House, "a small minority who rip off the welfare system cost the taxpayer a sizeable amount of money. Last year 714 people were convicted of fraud totalling over $23 million". But far from offering an amnesty for others to confess, Mr Borrows threatened to lock up the spouses and partners of welfare cheats for up to a year.

Imagine the shrieks of outrage in the mansions of Remuera and Fendalton if wives of the tax fraudsters faced the same justice.

The two Christchurch surgeons used family trusts to avoid the 39 per cent personal tax rate introduced in 2001.

Mr Penny's company earned between $655,000 and $832,000 in the years in question from his services, but he drew a salary of only $100,000. Mr Hooper's services resulted in net earnings of between $550,000 and $712,000, but he drew an annual salary of just $120,000. In both cases, the difference was paid into family trusts, which were taxed at a lower rate, to which the surgeons had full access.

The Supreme Court heard that, as a result, their annual tax bills were reduced by between $20,000 and $30,000. It ruled that setting your salary at such an artificially low rate was tax "avoidance", which in the world of beneficiary bashing is referred to as "cheating".

In an article last week, Massey University taxation lecturer Deborah Russell called tax avoidance "a rort" and she says there's a lot of it going on. She has graphed the number of taxpayers at each income level and discovered "a curious peak" occurs around the level where the top rate kicks in. And it moves over time, as tax rates alter. People are using "tax-planning techniques" to avoid the higher rates. It's "like the unemployed beneficiary who won't get a job", she says.

Victoria University tax lecturer Dr Lisa Marriott estimates that in 2011, tax evaders cheated the country of between $1 billion and $6 billion, while welfare fraud cost $39 million. She told 3 News: "The problem of tax evasion is at best-case scenario 25 to 50 times the financial amount of welfare fraud, and at worst-case scenario, potentially 100 to 150 times the amount."

She also found the courts' treatment of the two groups is far from equal. The average offending of tax fraudsters is $270,000, with those found guilty having a 22 per cent chance of being jailed. The average welfare fraudster gets away with $70,000, but if convicted, has a 60 per cent chance of being jailed. Time to set Paula Bennett loose in Remuera?

Brian Rudman's first news story was for Auckland University student paper Outspoke, exposing an SIS spy on campus during the heady days of the Vietnam War. It resulted in a Commission of Inquiry and an award for student journalist of the year. A stint editing the Labour Party's start-up Auckland newspaper NZ Statesman followed. Rudman decided journalism was the career for him, but the NZ Herald and Auckland Star thought otherwise when he came job-hunting. After a year on the "hippy trail" overland to London, he spent four years on Fleet St with various British provincial papers. He then joined the Auckland Star, winning the Dulux Journalist of the Year award for coverage of the 1976 Dawn Raids against Polynesian overstayers. He has also worked on the NZ Listener, Auckland Sun, and since 1996, for the NZ Herald as feature writer and columnist. He has a BA in History and Politics.